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The fall of Lebanon’s ceramics king

The cracks began to show when energy prices began to rise and the Lebanese government revoked safeguard measures

by Sami Halabi

Uniceramic once ruled on high in the Lebanese ceramics market. Established in 1973, the company’s fortunes began to fade as it entered its fourth decade of operations — a combination of subsidized imports, record high energy costs, the removal of safeguard measures and an inability to relocate operations outside Lebanon saw Uniceramic’s market position fade.

Today it no longer exists

According to Lebanon’s Ministry of Economy and Trade (MOET), by mid-2006 the company constituted 82 percent of local ceramics production. While this may be an impressive figure, when the total size of the industry is taken into account, it becomes less awe-inspiring. According to government figures, in 2003 local production of ceramics stood at 48 percent of total market share; by 2005 it had dropped to 31 percent.

“Prices fell even though production costs went up. This was reflected in Uniceramic’s decreased profits and with returns on investment registering losses for three consecutive years,” said an official from the Trade Remedies Investigative Authority (TRIA), who asked for anonymity, as they were not authorized to speak to the press.

The TRIA, overseen by the MOET, is the government body that investigates and makes recommendations as to whether measures should be taken to protect certain strategic industries.

With surging imports of ceramic tiles flooding the market and costs soaring for the energy necessary to fire the ovens used for ceramics manufacturing, Lebanon’s industry simply had no way to compete with countries such as Egypt and China, which enjoy cheaper labor and energy. As such, in March 2006, the Association of Lebanese Industrialists (ALI) put forward a petition to request safeguard measures be applied to the ceramic tile industry. The subsequent TRIA investigation, completed by May of the same year, found that between 2001 and 2005 imports of ceramic tiles had risen by 63 percent, which it classified as a “significant rise.”

A debate over how much and what kind of protection should be adopted promptly ensued. Lebanon is not a member of the World Trade Organization (WTO), mostly due to matters related to intellectual property and other compliance issues. The country does, however, apply many of the organization’s trading rules, as well as those of the Greater Arab Free Trade Area (GAFTA), that seek to eventually abolish tariffs between most Arab nations.

As a safeguard measure, Lebanon decided to adopt the WTO’s “most favored nation” policy that, basically, states that all countries must be treated equally. Accordingly, in September 2006 the MOET, then under Minister Sami Haddad, proposed to the Council of Ministers that an ad valorem safeguard measure of 20 percent, or a minimum of $2 per square meter (whichever was higher) be applied to ceramic imports for a period of three years, even when these were arriving from GAFTA countries. The Council of Ministers agreed to levy the tax but only for a period of one year, according to official documents obtained by Executive. Both Syria and Egypt promptly filed complaints with the Lebanese Government and the Arab League.

This was not the first time the Lebanese government had granted Uniceramic or the ceramics industry its protection.

They also enjoyed protection up until the post-war government headed by Salim el-Hoss “removed customs on everything, even whisky,” said Joseph Ghorra, chairman and largest shareholder of Uniceramic.

Ghorra explained that the political initiative to protect his industry in 2006 came largely from the late Industry Minister Pierre Gemayel, who was also the main proponent of a bill aimed at protecting national industries from cheaper foreign imports.

“If [Gemayel] had not got into a huge political fight with [then Prime Minister] Fouad Siniora, nothing would have happened,” said George Gorayeb, general manager of Lecico, now Lebanon’s largest ceramics manufacturer, which also benefited from the safeguard measure. (Ghorra actually helped setup Lecico and still owns a stake). Gorayeb said Gemayel was able to get the protective measures instituted for one year, but “when he died, so did [the measures].”

Two months after protection was granted, gunmen assassinated Gemayel in his car.

A little more than two weeks later, on December 8, Lebanon replaced its aging anti-dumping legislation with the “Law on the Protection of National Production.” Under the new law Lebanese industries would be protected from dumping, subsidized imports and substantial increases in imports.

The law looked to be a boon for Lebanon’s industrial sector, long overlooked by policy makers as a potential driver of the country’s economy.

“As long as this was in place the company was making money,” said Fadi Abboud, president of the ALI and Lebanon’s current Minister of Tourism, in reference to the safeguard measure. However, even though the safeguard measure may have kept Uniceramic alive, the company wasn’t exactly kicking.

According to disclosure figures obtained from Zawya Dow Jones, the company had managed to accumulate $8.2 million in losses by the end of 2007, despite having enjoyed the safeguard measure until September of that year.

A large part of this loss was seen to be a result of the company’s cost structure, which relied heavily on the consumption of natural gas. The other culprit was Uniceramic’s loss of market share — resulting from cheaper import prices in lower-end ceramic tiles.

“Egypt is the biggest cause of the flood that started in Beirut on the lower-end of the market,” said Gorayeb, whose company also manufactures ceramics in Egypt.

During the period from 2004 to 2007, Egyptian ceramic tiles constituted a total of 37 percent of total imports, with the rest coming from China, Spain, the United Arab Emirates and Italy, according to the TRIA.

Egyptian ceramics producers are the recipients of longstanding government supplied gas subsidies, which rose from $2.6 billion in Egypt’s 2004 fiscal year, to $11.41 billion in the 2008 fiscal year. Gorayeb explains that as of 2009, his Egyptian factories paid 6 cents per cubic meter in costs, while in Lebanon he pays $1. This, he says, allowed Egyptian products to undercut prices and sell at around 50 cents per square meter below Uniceramic’s prices.

When the company did apply for safeguard renewal in August of 2007, one month before the measure was set to expire, the TRIA began a second investigation, covering the period from 2004 to 2007.

“The picture that emerged during this review was that imports continued to grow, though at a slower place, amounting to 32 percent for the entire investigation period — this is almost half the rate of increase under the initial review,” said the TRIA official.

By September of 2007, the safeguard had lapsed and industry leaders began to get jittery as energy prices continued to skyrocket.

“We asked [the MOET] why did you stop [the measures]? This company will go bankrupt,” said Abboud. “They said: ‘We did not stop. When we gave [protection] to Uniceramic, the implementation procedures had not been issued. In the beginning we did it to placate Pierre Gemayel. [Now] we are going to give it back according to the procedures.’”

The implementation procedures, which total 103 articles, were eventually issued detailing how an investigation would proceed. This time it seemed the investigation would not be a short and sweet affair for the ceramics industry.

“They did not implement [the decree]. They kept asking us to give them numbers…and they didn’t implement it,” said Ghorra.

Others were less forgiving

“We put in a million applications but the people at the ministry are liars, and you can write that and underline it three times,” said Gorayeb. “They are trying to impose their own form of neo-liberalism.”

As Executive went to print, the TRIA had not responded to requests for comment.

While the investigation continued into 2008, Uniceramic was trying to keep its head above water. One of the tenets of the safeguard measure was that those enjoying its protection, such as Uniceramic and Lecico, could not raise their prices.

Nevertheless, real estate executives who spoke to Executive on condition of anonymity complained of a “30 percent rise” in Uniceramic’s prices. Ghorra denied this claim, saying that the perceived rise was due to a new product mix focused on the high-end segment, which Uniceramic was attempting to adopt to adapt their model to the new market realities.

However, as Abboud noted: “A factory cannot survive only on the upper-end, you have to have the bread and butter with an olive.”

The price-fix also came at a time when the market price of ceramics was surging. According to TRIA, during the first three months of the safeguard’s application the average price of ceramics had increased by 50 to 70 percent. The measure has been decried by the industry as yet another reason local ceramics could not take advantage of the increased demand and reconstruction subsequent to the July 2006 war.

“For those families that were forced to rebuild their homes, it is part of the Ministry’s responsibility to ensure that they have access to building materials, such as ceramic tiles, at reasonable prices,” said the TRIA official.

Realizing that their model was unsustainable, Uniceramic attempted to move its operations away from Lebanon. Instead of diversifying its product-mix, as Lecico currently does with its Egyptian production, Uniceramic deemed the market oversaturated and the company attempted to set up shop in gas-rich Qatar.

“The Qatari [Energy and industry] Minister Abdullah bin Hamad al-Attiyah was generous enough to give us a license without a Qatari partner,” said Ghorra, though he added that, “When people saw that we did not have a Qatari partner they started to make things complicated.”

Ghorra said Uniceramic is still actively seeking out a Qatari partner to restart the company in the Gulf.

By April 2008, the company finally threw up its hands and closed its factories in Lebanon’s Bekaa Valley; it also had let go of the majority of its 450 workers. Media reports at the time stated that the company was losing $15,000 per day.

Uniceramic laid the blame squarely at the feet of the MOET.

“Sami Haddad made us empty promises. He kept promising us till he couldn’t any longer and then he told me to take the machines and work outside Lebanon,” said Ghorra.

Haddad, who is now chairman and general manager of Byblos Invest Bank, denies that he made any such suggestions.

Victim of a crisis

Uniceramic's board of directors tried to move its manufacturing plant out of Lebanon

“They know what is in their interest and they don’t need my advice. They can manufacture something else,” said Haddad. “It is not very logical for us to try to compete in producing stable commodities. We cannot decide to produce a good with a higher cost, impose it on the consumer and not face competition.

“Don’t forget we were faced with a very strong inflationary pressure at that time; people were clamoring about and everything was expensive.”

It’s worth noting that while the second investigation was ongoing, Lebanon’s government was in the middle of a full-blown political crisis that culminated in the events of May 7, 2008. Masked gunmen from opposing political parties fought battles in Beirut and in the Chouf region. The fighting stopped a few days later, with Lebanon’s political factions eventually signing the Doha agreement, which paved the way to the formation of a new interim government. In July of 2008, Mohamad Safadi became the Minister of Economics and Trade and extended the investigation period to 18 months until February 2009 — the maximum duration allowed by the implementation decree.

“First it was [Minister] Haddad then [Minister] Safadi who asked us to wait until the elections were over,” said Ghorra, referring to the June 2009 elections.

By February of last year it seemed the final nail in Uniceramic’s coffin had been hammered. The MOET adopted the TRIA’s decision to reject the safeguard petition.

“At that point in time, help for the ceramic tile industry was to be found outside the Law of Protection of National Production, given that the main issue in the Uniceramic case is the high energy costs rather than the increase in imports,” said the TRIA official. The official also stated that price hikes subsequent to the lifting of safeguard measures, and the demand for ceramics after the 2006 war, also contributed to the decision.

Almost instantly, industry leaders cried foul, stating that the subsidies foreign importers were receiving were not taken into consideration in the decision.

When Executive contacted the WTO, a spokesperson confirmed that the organization allows any country to “seek the withdrawal of the subsidy or the removal of its adverse effects, or the country can launch its own investigation and ultimately charge extra [countervailing] duties on subsidized imports that are found to be hurting domestic producers.”

When asked if Egypt’s gas subsidies were legal under WTO standing regulations, the organization declined to comment.

Upsetting Egypt by imposing safeguard duties on their exports may not be a wise choice, given that the same gas Cairo offers at subsidized rates to Egyptian industries is now being piped to Lebanon’s power plants, saving the country’s debt-ridden government around $240 million a year in fuel oil expenditure.

“No one, especially in the Arab world, wants to discuss subsidies. The Ministry of Economy is trying to use every trick in the book and find reasons why we should not give Uniceramic any safeguard measures,” said Abboud, who was chosen for the post of tourism minister by opposition leader Michel Aoun.

The Ministry of Economy and Trade is still headed by Mohamad Safadi, a long-time member of Parliament and part of the ruling March 14 coalition.

A less than level playing field

The more blatant and pressing issue with regard to safeguards in the Lebanese economy relates to which industries are receiving protection from imports. Currently, cement and electric cables both enjoy a ban on imports due to trade licensing agreements issued by the Ministry of Industry in 1992 and 1977 respectively. These industries do not have to go through the laborious process of investigations and petitions that other industries seeking protection must endure.

“They say cement is strategic but are electric cables also? When we look we find out there are a lot of companies that are enjoying safeguard measures,” said Abboud. “There is no economic logic; it looks like it very much depends on who owns what.”

The Ministry of Industry did not respond to requests for comment.

What is even more incredulous is that some of the owners in these industries are the most influential political figures in Lebanon. Walid Jumblat, an MP and head of the Progressive Socialist Party (PSP), is chairman and general manager of Ciment de Sibline, a company with a production capacity of 1 million tons of cement per year. The PSP also currently holds three seats in Lebanon’s Cabinet, including the Ministry of Public Works and Transport, which relies on cement to develop its projects.

Jumblat owns a 19.16 percent stake in the company along with GroupMed, owned by Prime Minister Saad Hariri and his family, which has a 19.65 percent stake.

Holcim Liban, Lebanon’s largest cement producer, is partly owned by the Maronite church, which has a 4.13 percent stake. The company made $167 million of revenues in 2008.

Haddad called the banning of cement imports a “mistake” and agreed that protection was being applied selectively. “Uniceramic has been discriminated against unfavorably; other industries are being positively discriminated for. [In that] there is no doubt,” he said.

In September 2009, Uniceramic finally filed for bankruptcy with $12 million in liabilities. When capital losses are also taken into account, Ghorra says the company is down around $17 million. Uniceramic’s shares were delisted from the Beirut Stock Exchange in November of last year.

Nonetheless, Ghorra insists that since energy prices have now stabilized the company can be profitable once again, citing a study conducted by major international accounting and consulting firm Deloitte & Touche. Deloitte & Touche declined to provide the study due to confidentiality constraints. Ghorra was not available for further comment on the issue. Ghorra said that his company has sold Uniceramic’s name to Qatar for $1 million and is currently seeking both foreign and local investors to buy in.

“We are talking to two parties in order for them to buy the entire company, and we are willing to let them keep a part of the staff,” Ghorra said.

It seems the company is not just targeting the private sector for help.

“We did not knock on the prime minister’s door before, but we are knocking on it now,” he added.

As for Lebanon’s industrial sector, it continues to attract less investment and constitutes a decreasing portion of gross domestic product. It may well be the case that unless companies, let alone sectors, are treated equally then this trend will continue, and the fate of Uniceramic may well be replicated across other industries.

“Uniceramic was around for 30 years; in just a few years, energy prices increased, hit its budget and now it’s gone,” said Gorayeb. “We weren’t born just to close factories. We have to get to a point where we have logical solutions because what is happening is not logical.”